When calibre version 2.0.0 was released, it was transitioned over to a new graphical toolkit, Qt5. Qt no longer supports Windows XP (and neither does Microsoft, so there is little hope of anything changing).

As a result, the latest version of calibre to work on Windows XP is calibre 1.48. If you want to run calibre on Windows XP, you have a few options:

Install version 1.48 (download it HERE) -- yes it is an old version, but it still works just fine, doesn't it. It hasn't magically stopped doing what it used to do just because there is a newer version.
This is the official recommendation, as suggested on the calibre website.

Insist on running the latest version anyway. Yeah, Qt isn't supported. Yeah, it might crash horribly. But it *might* work, people *have* reported success. As long as your processor supports the SSE2 instruction set, you may very well get lucky.
You must run from source -- the calibre developers will not support this.

Download the latest version of calibre. It won't install, however, you can extract the Calibre2 folder using lessmsi (has GUI) or directly via the Windows Installer Service. Delete the corresponding folder "C:\Program Files\Calibre2\" and replace it with the one you extracted.

Go to your calibre source checkout. Edit the file "src/calibre/gui2/__init__.py" and change the line that says "if isxp:" to "if False:" -- this disables the incompatibility error.

calibre 2.x will now run -- whether it works remains to be seen. Good luck.

Trying to run the new version is too risky, but the old version is broken!
Do you have a Kobo H2O, the driver for which appeared post-calibre2.x? If so, try this plugin, or run from source as described above, but with my backports described HERE. The backports can and will work to fix other breakage, e.g. Amazon website changes for metadata download. The plugin is just for the Kobo.

Upgrade your computer. Microsoft no longer supports Windows XP, not even for security vulnerabilities. Okay, theydidanyway. But we can safely assume it won't happen again.

For a few hundred dollars you can get a brand-new computer that runs Windows 7/8 and does everything you need it to do, with up-to-date software -- that includes running the latest version of calibre.

I don't have the money/I don't want to spend the money on a new computer, my old one works fine no matter what Micro$oft thinks!
Rather than upgrading the hardware, maybe you can upgrade the OSware? Linux is free, and runs fine on old hardware -- even if your computer isn't compatible with Windows 7/8, you can still run a modern operating system. You can even run both linux and Windows XP on the same computer.
Popular choices of linux distribution for linux newbies include Ubuntu and Linux Mint. I suggest the latter -- it has a friendlier desktop and is closer to the experience one would expect coming from a Windows environment.
Installing linux is fairly easy -- all you need to do is burn a disk image to a USB drive and reboot your computer -- and be good at following (clear) directions.

Yes, I followed all the instructions, including setting up the environment variable and testing to make sure it's set.
I even followed the implied instruction that I should have python installed, and installed version 2.7.9 .

But what is it I'm suppose to do next ?

I just want to use the latest version which should work just fine on my system seeing as I've been using version 2.0.0 until now which I suppose was the latest to install on xp.

If you still get the incompatibility warning, you haven't set it up correctly.
If it was set up correctly, just run calibre as you would normally.
If nothing happens, maybe it crashed horribly -- like I warned.

What is the output from running "calibre-debug -g" from the command prompt?

calibre 2.23* isfrozen: True is64bit: False
Windows-XP-5.1.2600-SP3 Windows ('32bit', 'WindowsPE')
('Windows', 'XP', '5.1.2600')
Python 2.7.9
Windows: ('XP', '5.1.2600', 'SP3', 'Multiprocessor Free')
Python function terminated unexpectedly
calibre requires Windows Vista or newer to run, the last version of calibre that could run on Windows XP is version 1.48, available from: http://download.calibre-ebook.com/ (Error Code: 1)
Traceback (most recent call last):
File "site.py", line 132, in main
File "site.py", line 109, in run_entry_point
File "G:\WorkSpace\Programming\Cygwin\home\User\calibre-2.23.0\src\calibre\debug.py", line 220, in main
calibre(['calibre'])
File "G:\WorkSpace\Programming\Cygwin\home\User\calibre-2.23.0\src\calibre\gui_launch.py", line 63, in calibre
main(args)
File "G:\WorkSpace\Programming\Cygwin\home\User\calibre-2.23.0\src\calibre\gui2\main.py", line 489, in main
gui_debug=gui_debug)
File "G:\WorkSpace\Programming\Cygwin\home\User\calibre-2.23.0\src\calibre\gui2\main.py", line 335, in run_gui
from calibre.gui2.ui import Main
File "G:\WorkSpace\Programming\Cygwin\home\User\calibre-2.23.0\src\calibre\gui2\ui.py", line 51, in <module>
from calibre.gui2.open_with import register_keyboard_shortcuts
File "G:\WorkSpace\Programming\Cygwin\home\User\calibre-2.23.0\src\calibre\gui2\open_with.py", line 65, in <module>
from calibre.utils.winreg.default_programs import find_programs, friendly_app_name
File "G:\WorkSpace\Programming\Cygwin\home\User\calibre-2.23.0\src\calibre\utils\winreg\default_programs.py", line 17, in <module>
from calibre.utils.winreg.lib import Key, HKEY_CURRENT_USER, HKEY_LOCAL_MACHINE
File "G:\WorkSpace\Programming\Cygwin\home\User\calibre-2.23.0\src\calibre\utils\winreg\lib.py", line 136, in <module>
raise RuntimeError('calibre requires Windows Vista or newer to run, the last version of calibre'
RuntimeError: calibre requires Windows Vista or newer to run, the last version of calibre that could run on Windows XP is version 1.48, available from: http://download.calibre-ebook.com/

I do believe that is exactly what I did (making the iswindows check fail, just like on osx and linux, so it uses the Dummy() ), except it appears now the Open With code also uses it, and I am not sure how to abort that.

Just comment it out, and maybe replace it with dummy functions. Open With will then fail, but everything else should still work. Though really, this is a losing battle you are fighting. More and more places in calibre are going to start using stuff not available in XP.

Everyone can decide for themselves when it isn't worth their personal effort anymore, and then freeze their source checkout right before then.

@J.C.,
In the meantime (because I may end up writing more advanced instructions), the simple isxp disabling *should* work fine using calibre 2.20,and checking out commit e07fc77a529b1787e9de6210d3e1b56d7569ed27.

Or disabling default programs as I wrote above, based off of commit ff82ba858ca507be263a4cd76495c4c41587a47a.

The solution to running Calibre 2.x under XP is to run the Windows 8.1 comparability check from Microsoft and if the computer is compatible, backup the system drive, install a 64-bit Windows 7 or Windows 8.1 in place of XP. But you will have to install your programs and configure your system all over again.

But in the end, it's worth is a you won't be stuck trying to run things that won't run or won't run well enough. Sigil and Calibre are two programs that do run better with Windows 7 or 8.1. It's never going to get better. It's only going to get worse.

XP IS DEAD! Time to move on even if that means having to buy a new computer or upgrade the one you have.

The solution to running Calibre 2.x under XP is to run the Windows 8.1 comparability check from Microsoft and if the computer is compatible, backup the system drive, install a 64-bit Windows 7 or Windows 8.1 in place of XP. But you will have to install your programs and configure your system all over again.

But in the end, it's worth is a you won't be stuck trying to run things that won't run or won't run well enough. Sigil and Calibre are two programs that do run better with Windows 7 or 8.1. It's never going to get better. It's only going to get worse.

XP IS DEAD! Time to move on even if that means having to buy a new computer or upgrade the one you have.

And... we have our first winner for the Completely Missing The Point Award!!!

In case the objective of this thread has eluded you: We know. In fact, I strongly advised against sticking with XP in the opening post.

And henceforth we shall restrain ourselves to non-redundant discussion, for example, allowing people to discuss their efforts at doing inadvisable things with full knowledge of the situation. Because everyone deserves the right to experiment if they so desire.

Thank you for bringing up this very salient point. But from now on, please restrict yourself to discussing the technical aspects of the ideas in the OP.